03/31/2010 v.20 DRAFT – DO NOT CITE OR QUOTE For NPC Study Discussion Only 1 Summary of Demand Perspective Hard Truths provided evaluation of baseline demand to 2030 from mostly a pure volume perspective The Transportation Efficiency (Topic Paper #28) provided possible paths with probability statements, which frames the demand side Missing were specific policy proposals in the context of economic decision makers and existing market structures Propose to examine the economic feasibility of their paths through decisions of economic decision makers. –Objective output would be demand for fuels – how much at various prices by type. –Likely output is volume demanded for petroleum products at various prices and relative volumes demanded of alternative fuels at those prices. –Want to track what the market will support vs. cost & benefits of market intervention by gov’t Integration of supply and demand occurs in the aggregated market place. From a demand perspective, the supply question is how much can be offered on the market at competitive prices with petroleum products and by when. –Requires analysis of what will happen to petroleum prices (the answer requires integration of supply and demand) –Analyze what alternative fuels will emerge without market intervention –Identify cost and benefits of market intervention to resolve gaps

03/31/2010 v.20 DRAFT – DO NOT CITE OR QUOTE For NPC Study Discussion Only 2 Sample graphic display to summarize conclusions, another would display carbon, and perhaps one on cost Chunk categories based on Hard Truths Transportation Efficiencies Could be +/-

03/31/2010 v.20 DRAFT – DO NOT CITE OR QUOTE For NPC Study Discussion Only 3 Demand Framing Questions What are the mobility needs for 2030 based on current population, manufacturing and urbanization growth? (Basecase) –Modal mix given current transportation trends and infrastructure development –Equipment mix given current trends and known regulations (new CAFEs) –Fuel demanded and mix How will alternate fuels change the modal, equipment and fuel mix demanded? External effects: What impact will it have on unit costs for manufacturing? Retail? Consumers? What impact will it have on equipment manufacturers? –Speeding up the NPI cycle reduces the time to recover R&D and tooling investment

03/31/2010 v.20 DRAFT – DO NOT CITE OR QUOTE For NPC Study Discussion Only 4 Basecase Demand Assumptions Petroleum based product prices without alternate breakthroughs CAFEs go to 35mpg (equipment development) Population growth GDP, particularly goods production, growth Urbanization growth Transportation infrastructure growth –Historical trend growth –Investment necessary to accommodate population and GDP growth Industry structures

03/31/2010 v.20 DRAFT – DO NOT CITE OR QUOTE For NPC Study Discussion Only 5 Passenger Decision Tree Automobile is clearly largest target for analysis and change

03/31/2010 v.20 DRAFT – DO NOT CITE OR QUOTE For NPC Study Discussion Only 6 Passenger Decisions to Analyze (2 of 4) Analysis of Passenger Mode choice What percent of Auto miles are for consistent daily commuting (home to work and back)? Of that, how much is in concentrated metro areas? What percent of commuters in those areas use mass transit? What would encourage higher utilization of mass transit? Estimate cost and benefit to increase utilization. Estimate effect of mode switching on fuel consumption. Analysis of Passenger Vehicle Choice What is distribution of fleet over vehicle models and model’s mpgs? What are auto owners' decision variables? What would change choices toward higher MPG vehicles? (Hold efficiency of choices constant) Estimate cost and benefits to influence choices. (Mkt interventions would be tax on vehicles, tax on fuel) Estimate effect of fleet composition on fuel consumption. (Requires analysis of fleet expansion & vehicle replacement rates)

03/31/2010 v.20 DRAFT – DO NOT CITE OR QUOTE For NPC Study Discussion Only 7 Passenger Decisions to Analyze (3rd of 4) Analysis of Passenger Vehicle Choices over Technology Improvements What is distribution of fleet over MPG? What new technologies can be introduced to improve MPG without diminishing the owner's satisfaction or cost of owning and operating the vehicle? Specify new technology, material, etc in either vehicle design or power train What would be effect on owner's satisfaction and cost of owning and operating the vehicle? (Estimate demand for vehicle.) Will manufacturer / technology owner be able to recoup R&D and tooling costs at prices that consumers are willing to pay? (For economic sustainability, need to have incremental purchase price cover NPI costs and be equal to the value of improved fuel efficiency for the end user. Implies mkt value of greater MPG=NPI costs) Example: Suppose vehicle can move from 20 mpg to 40 mpg. Typical owner drives 15,000 m/yr. Fuel saved is 375 gal/year. At $3/gal of gasoline, annual benefit to owner is $1125. Over 3 years, $3375. Theoretically, economically viable NPI can cost upto volume of sales * $3375. Suppose volume is 5 mil veh/year. Over 3 years, volume is 15 mil; so revenue available for NPI would be 15*3375=$51bil. How do you assure that this happens? There are multiple manufacturers, n, seeking a solution. All may assess that they would each get an equal share of the market, 1/n, and none can develop a solution on 1/n * $50bil, so nothing changes. Point is market structure and incentives matter. Estimate public cost of making tech happen. Estimate effect on fuel consumption.

03/31/2010 v.20 DRAFT – DO NOT CITE OR QUOTE For NPC Study Discussion Only 8 Passenger Decisions to Analyze (4th of 4) Analysis of Passenger Vehicle Fuel Choice Similar to Analysis of Passenger Vehicle Choices over Technology Improvements. In this case, fuel cost and availability become an added variable in choice of technology. If alternative fuel can be delivered at same cost with same reliability as petroleum product, then decision is same as technology choice (3 rd Passenger Decision). A key issue for the consumer becomes relative risk of petroleum and alternatives in terms of price volatility and availability. It is conceivable that petroleum would be the more volatile. The more risk averse consumer may choose flexible equipment. Question for supply: Will alternatives be more or less risky than petroleum fuels?

03/31/2010 v.20 DRAFT – DO NOT CITE OR QUOTE For NPC Study Discussion Only 9 Shipper’s Decision Tree – Fuel is outcome of many decisions Freight accounted for 20-23% of fuel consumed in 2007

03/31/2010 v.20 DRAFT – DO NOT CITE OR QUOTE For NPC Study Discussion Only 10 Possible Sources of information Need to decide how broadly we will delve into transportation network Recommendations on infrastructure and transportation regulation are likely out of scope unless Chu brings in LaHood. American Trucking Associations IANA – Intermodal Association of North America JD Power? US DOT Cat Walmart Fed Ex ADM Horizon Lines (Domestic maritime shipper) Auto company Rail company